Sucheta Dalal :Dear Mr Bajpai... (24 February 2002)
Sucheta Dalal

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Dear Mr Bajpai... (24 February 2002)  

Congratulations on your new assignment as the watchdog of India’s capital market. One of your first comments on taking over as SEBI chief was that you felt ‘humbled by the responsibility that has been entrusted’ to you. It is indeed an awesome responsibility.

Funnily enough, although you’re the watchdog you will probably feel more like a goldfish in a glass bowl — operating under the relentless and unwavering scrutiny of the media and the market.

Unlike the Reserve Bank and some other institutions, which operate out of an ivory tower and have the luxury of hiding behind statutory secrecy rules, the capital market is all about transparency and full disclosures. There is nowhere to hide. Every action and every silence has immediate consequences, and immediately attracts comment.

This intense attention, flattering initially, can soon become exasperating. It is also amazing how quickly the market can sense and size up the tone and style of an organisation under a new chairman. You have already made a good beginning. The fact that you found time to meet every official in SEBI, shake their hands, ask their names and to talk to them on your first day, has already gone down well with the organisation that is crying out for a sensible Human Resources policy.

SEBI needs an organisational overhaul, starting bottom upwards; it also needs to develop a strong cadre of officials with the right incentives and opportunities to rise to be highest level.

A starting point would be to put in place new operating rules and to reverse some practices that have been developed over the last seven years. There is a need to restore accountability among SEBI officials.

You probably do not know that in the last few years, several files dealing with sensitive issues have gone missing. Sometimes these turned up a few weeks later, at other times not, and occasionally they even returned with missing pages. You probably want to make it clear you would not take kindly to such incidents.

As far as discipline goes, in one respect you are already leading by example. Your Executive Directors, who had developed the habit of strolling into office well past the official time, have suddenly turned punctual.

Another issue that you may want to tackle is the practice of regulating by consensus. SEBI has developed the habit of setting up innumerable committees to debate every conceivable market-related issue. These committees were often a waste of time, because the discussion had little to do with SEBI’s final decisions.

The Takeover Committee, for instance, has turned into a sort of standing committee, yet its frequent tinkering with the rules has not led to any improvement in the credibility of SEBI’s takeover rules. In recent times, the controversial changes in Larsen & Toubro’s board and those in ACC Limited have in fact destroyed investor confidence.

Incidentally, the takeover regulations were one area were SEBI has long had the powers to issue directions to companies, but seldom used them. In fact, the Herbertsons case is a great example of powers remaining unused. The matter was referred to SEBI in 1995.

But mysteriously, it was only seven years later, on your predecessor’s last day in office, that orders were suddenly issued. The relevance and coherence of that order is another matter. Bringing investors back to the market will require SEBI to be even-handed in its supervision and swift in its disciplinary action.

In this, you are fortunate that amendments to the SEBI act are soon to be cleared, which will strengthen your powers. For instance, the tightening of insider trading rules which were formulated in October 2000 and cleared by the SEBI board in May last year, were only notified on your predecessor’s last day in office.

Next, there is this business of SEBI behaving like a serious quasi-judicial body and issuing reasoned orders. For the last three years or more, investor associations and market intermediaries have been trying to persuade SEBI to issue reasoned orders. SEBI has to help build case law for the capital market which has to be published and made available on its website for all investors and market intermediaries. This is the only way to make the Securities Appellate Tribunal and the courts treat SEBI orders with seriousness and respect. The same goes for SEBI’s press releases too.

A detailed release that is posted on the website, which names the wrongdoer, outlines the offence and clearly specifies the punishment will surely act as a strong deterrent.

Finally, since you said that you want to bring investors back to the market, let me suggest a big confidence-builder. Pick up just three out of the hundreds of companies which have vanished with investors’ money during the 1994-97 public issues mania and make an all-out effort to bring them to book.

Only when investors know that you are willing to go after companies who cheated them, will they be confident of a fair deal from SEBI in future. It is a tough job, and one that will require you to be constantly on your guard; but if you can actually bring more investors into the capital market and act even-handedly, you will win the support of investors and the respect of corporate houses that tend to ‘jump’ on regulators’ attempting to discipline them. That is a big reward in itself.

With best wishes,

-- Sucheta Dalal